The economists at Zillow pulled out their crystal ball — and hordes of data — to predict which five Twin Cities housing markets will be the hottest this year.

The top two are in north Minneapolis, where home buyers are on the hunt for the kinds of bargains they can’t find in other parts of the city.

“People are desperately searching for affordable houses,” said Emily Green, a sales agent with Sandy Green Realty in north Minneapolis and a past president of the Minneapolis Area Association of Realtors. “There’s been significant investment in those areas and it’s really showing.”

The top gainer is the Folwell neighborhood, where the Zillow Home Value Index is expected to increase 7.8 percent over the year. The No. 2 spot went to the adjacent McKinley neighborhood, where the index is expected to increase 7.6 percent. A pair of Minneapolis neighborhoods that are adjacent to the Mississippi River front took the third and fourth spots, while Dayton’s Bluff on the edge of downtown St. Paul took fifth. The Zillow Home Value Index uses data from past home value trends, current market conditions and other economic indicators to predict home values.

Zillow’s chief economist, Svenja Gudell, said that she sees a similar pattern in other major metro areas where rising prices in once-affordable areas are driving sales — and prices — in the most affordable urban markets.

“As more people do this, demand in that area starts to rise, which brings up the price of homes,” said Gudell.

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The reopened Lowry Bridge provides a gateway from the Folwell and McKinley neighborhoods to northeast Minneapolis, which has already seen prices surge.

Historically, the North Side has been one of the most volatile markets in the Twin Cities. It was ground zero for the predatory lending and foreclosure crisis, and house prices fell first and fastest in that area.

Similarly, the recovery has been one of the most robust. Data from the Minneapolis Area Association of Realtors shows that from January through November last year there were 99 closings in the Folwell neighborhood, a 29 percent increase over the previous year. The median price of those closings was $124,500, nearly half the metro-wide average, but 51 percent higher than last year.

All of the top five neighborhoods in the Twin Cities have seen dramatic improvements in infrastructure and the addition of key amenities that are important to home buyers. In 2012, for example, a new Lowry Avenue Bridge over the Mississippi River opened, creating a graceful new arched gateway into the McKinley and Folwell neighborhoods from northeast Minneapolis, which has already seen its house prices increase dramatically.

North Minneapolis, part of which is a federally designated food desert, is also getting two new grocery stores, including a full-service grocery that’s supposed to open this year and the new Wirth Cooperative Grocery, which has been in the works for nearly a decade.

Discussions are underway about a new greenway through the neighborhood, there’s a new public schools headquarters building, and several popular restaurants have opened. There’s another key factor: north Minneapolis once had one of the highest foreclosure rates in the city, but that’s no longer the case, and the backlog of vacant houses has been dwindling.

One of the area’s biggest attractions is its proximity to downtown Minneapolis and other much more expensive and newly gentrified neighborhoods.

“We’re right on the doorstep of the North Loop and we have easy access to everything else,” said Deb Wagner, a sales agent with Greenway Homes Realty on the North Side.

She said that people who are getting priced out of other once-affordable neighborhoods, including northeast Minneapolis, are now shopping on the North Side.

At the end of December, Wagner sold a 1,000-square-foot bungalow in the Folwell neighborhood the day it hit the market for $1,100 more than the $114,900 list price. The three-bedroom, two-bath house had been vacant for several years and had recently been renovated. After she accepted the offer, four agents said they’d be willing to also write an offer if the deal fell through.

“As prices go up everywhere else it’s going to drive up prices here because there will be higher demand in North,” she said. “It doesn’t surprise me that more and people are looking at north Minneapolis considering all the amenities that are being built here.”

Jim Buchta has covered real estate for the Star Tribune for several years. He also has covered energy, small business, consumer affairs and travel.

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